unit-economics

Analyze unit economics for PE targets — ARR cohorts, LTV/CAC, net retention, payback periods, revenue quality, and margin waterfall. Essential for software/SaaS, recurring revenue, and subscription businesses. Use when evaluating revenue quality, building a cohort analysis, or assessing customer economics. Triggers on "unit economics", "cohort analysis", "ARR analysis", "LTV CAC", "net retention", "revenue quality", or "customer economics".

Unit Economics Analysis

Workflow

Step 1: Identify Business Model

Determine the revenue model to tailor the analysis:

SaaS / Subscription: ARR, net retention, cohorts
Recurring services: Contract value, renewal rates, upsell
Transaction / usage-based: Revenue per transaction, volume trends, take rate
Hybrid: Break down by revenue stream

Step 2: Core Metrics

ARR / Revenue Quality

ARR bridge: Beginning ARR → New → Expansion → Contraction → Churn → Ending ARR
ARR by cohort: Vintage analysis — how does each annual cohort retain and grow?
Revenue concentration: Top 10/20/50 customers as % of total
Revenue by type: Recurring vs. non-recurring vs. professional services
Contract structure: ACV distribution, multi-year %, auto-renewal %

Customer Economics

CAC (Customer Acquisition Cost): Total S&M spend / new customers acquired
LTV (Lifetime Value): (ARPU × Gross Margin) / Churn Rate
LTV:CAC ratio: Target >3x for healthy businesses
CAC payback period: Months to recover acquisition cost
Blended vs. segmented: Break down by customer segment (enterprise vs. SMB vs. mid-market)

Retention & Expansion

Gross retention: % of beginning ARR retained (excludes expansion)
Net retention (NDR): % of beginning ARR retained including expansion
Logo churn: % of customers lost
Dollar churn: % of revenue lost (often different from logo churn)
Expansion rate: Upsell + cross-sell as % of beginning ARR

Cohort Analysis

Build a cohort matrix showing:

Cohort	Year 0	Year 1	Year 2	Year 3
2020	$1.0M	$1.1M	$1.2M	$1.1M
2021	$1.5M	$1.7M	$1.8M
2022	$2.0M	$2.3M
2023	$3.0M

Show both absolute $ and indexed (Year 0 = 100%) views.

Margin Waterfall

Revenue → Gross Profit → Contribution Margin → EBITDA
Fully loaded unit economics: what does it cost to acquire, serve, and retain a customer?
Gross margin by revenue stream (subscription vs. services vs. other)

Step 3: Benchmarking

Compare unit economics to relevant benchmarks:

SaaS Rule of 40: Growth rate + EBITDA margin > 40%
SaaS Magic Number: Net new ARR / prior period S&M spend > 0.75x
NDR benchmarks: Best-in-class >120%, good >110%, concerning <100%
LTV:CAC: Best-in-class >5x, good >3x, concerning <2x
Gross retention: Best-in-class >95%, good >90%, concerning <85%
CAC payback: Best-in-class <12mo, good <18mo, concerning >24mo

Step 4: Revenue Quality Score

Synthesize into a revenue quality assessment:

Factor	Score (1-5)	Notes
Recurring %
Net retention
Customer concentration
Cohort stability
Growth durability
Margin profile
Overall

Step 5: Output

Excel workbook with ARR bridge, cohort matrix, unit economics dashboard
Summary slide with key metrics and benchmarks
Red flags and areas for further diligence

Important Notes

Always ask for raw customer-level data if available — aggregate metrics can hide problems
NDR above 100% can mask high gross churn if expansion is strong enough — always show both
Cohort analysis is the single most important view for revenue quality — push for this data
Differentiate between contracted ARR and actual recognized revenue
For usage-based models, focus on consumption trends and expansion patterns rather than traditional ARR metrics
Professional services revenue should be evaluated separately — it's not recurring and margins are typically lower